GME stock’s earnings beat wasn’t quite what bulls would have you believe
This year video game retailer GameStop Corp. (NYSE:GME) has been struggling to fight back against the digital revolution. Worries that the firm’s core business — selling video games — will be eroded down to nothing by the growing popularity of buying and downloading video games online have pushed GME stock to multiyear lows. However, brighter-than-expected third-quarter results have given some investors hope. And they’ve allowed GameStop stock to rise 6.6% over the past month.
GME Stock Beats the Bears
GME bulls were pleased to see that the company’s sales increased in the third quarter and same-store sales maintained a modest 1.9% growth pace. Management’s forward guidance for the upcoming holiday shopping season wasn’t bad either. The company is expecting to see strong smartphone sales. There’s also a lot of excitement about new consoles and big game releases. With that in mind, management raised its 2017 outlook. The news helped boost GME stock higher and prompted a wave of positive press surrounding the stock.
Don’t get me wrong. I commend GME for producing such strong results while fighting against so many strong headwinds. However, I don’t think it will last. Investors who buy GME thinking a comeback is building momentum may find themselves sorely disappointed in just a few months.
Yes, sales increased for GameStop. But operating profit bombed. This is because the sales rise came largely from low-margin hardware, new software and collectibles. GME makes a lot of its money from pre-owned sales. This part of the business saw a decline in the third quarter. Digital sales were also lackluster, suggesting that the firm is struggling to keep up with the digital revolution.
Digital Trouble for GME Stock
It’s impossible to ignore the elephant in the room for GME stock: online game downloads. The company isn’t doing enough to fight against, or at least somehow join in on this trend. As InvestorPlace contributor James Bromley pointed out earlier this week, most expect video game sales to switch to digital almost completely within…